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• Organization of Slides:
– History
– Futures Contract Specifications
– Risk Management
– Index Calculations (Appear in the Extra Section).
• By 1986, the S&P 500 futures contract had become the second
most actively traded futures contract in the world, with over 19.5
million contracts traded in that year.
• Critics claim that individual investors have been driven out of the
equity markets because institutional traders' actions in both the
spot and futures markets cause stock values to gyrate with no
links to their fundamental values.
– mutual funds
– pension plans
– endowments
– insurance company
– other money managers.
• Thus, if the DJIA futures price rises one tick, i.e., from 10813 to
10814, a trader who is long one contract profits by $10 because
the value of the stock underlying the contract rises from
$108,130 to $108,140.
• SPDR. (http://www.amex.com).
• If investors are not very risk averse or if they are bullish about
the market, investors will raise their portfolio's beta by
borrowing additional capital and investing the borrowed funds in
risky securities.
• When they are bullish, i.e., they believe that the stock market
offers a relatively high expected return for a given level of risk,
they will increase the beta of their stock portfolio.
• When they are bearish, (or simply believe that the risk of the
market has increased), they will decrease their portfolio's beta.
N=
βD - βP
×
Portfolio Value
βF (Futures Price) × Multiplier
• The manager does not wish to incur the commission costs and
price pressure of selling stocks and then repurchasing them
after the anticipated decline.
N=
0.0 - 1.20 ×
$20,000,000
= -75.
1 (1280) × 250
• The Key: Set the target portfolio beta, d, equal to 0.0. Then, using the
equation above, we conclude that the manager should sell 75 futures
contracts.
• Suppose the manager was right about the market's movement, and
the S&P 500 declines to 1224, which is a 4% decline in the market.
• The NYSE defines a program trade as: "a wide range of portfolio trading
strategies involving the purchase or sale of a basket of 15 stocks or more,
and valued at more than $1 million".
• Recent growth in program trading has arisen from brokers who offer
institutions the ability to trade large portfolios of stocks with low cost and
little price impact.
• In 2001, program trading accounted for almost 30% of total NYSE volume.
©David Dubofsky and 8-25
Thomas W. Miller, Jr.
An Actual Pricing Example, 2/5/99
• SPH: 1,243.50
• S&P Index: 1,239.40
• T-bill rate: 4.35%
• Days to Expiration: 42
• Annual Dividend Yield: 1.32% (assume this is the
dividend yield in terms of its future value)
• Little did the designers of DOT realize that their system would
be adopted by index arbitrageurs, who now enter orders to buy
or sell portfolios of stocks, including the composition of any
index replicating portfolio (e.g., 1000 shares of IBM, 1267
shares of GM, etc.).
• At the same time, the arbitrageur will trade the necessary stock
index futures contracts.
• If you have created some slides that you would like to share
with the community of educators that use our book, please send
them to us!
• The divisor is printed in the Wall Street Journal every day and is
also available in the equity product information area at
http://www.cbot.com.
• For example, on April 24, 2001, the divisor for the DJIA was
0.15369402. On September 9, 1999, the divisor was
0.19740463.
Before Day 2 starts, we want to replace Merck with Intel, selling at $22.
1.000 20,115
• The levels of these and yet other indices are presented daily in
the Wall Street Journal. While each index is a different portfolio
of stocks, the method of computing each index is the same.